Circuit City seeks turnaround

STEPHANIE STOUGHTONAssociated Press

Published Saturday, December 13, 2003

RICHMOND, Va. -- Can Circuit City Stores Inc. catch a break?

Industry observers yawned when the consumer electronics chain drew hordes of shoppers during the holiday season's kickoff -- Best Buy Co. Inc. had already surpassed Circuit City with a robust sales performance in the third quarter.

And with holiday retail business slower than expected, analysts say there's even less to cheer about. They say Circuit City has fallen so far behind market leader Best Buy that it will be difficult to catch up, particularly in a difficult sales environment.

"Best Buy would have to stumble," said Todd Kuhrt, an analyst with FTN Midwest Research.

Whether Circuit City gets the chance to regain market share and become profitable hinges on extensive turnaround efforts that are still under way. Executives are drastically changing the way the company does business.

"We recognized early on that we needed to change," said John Froman, the company's chief operating officer. But, "it wasn't like we were able to wave a magic wand and change overnight."

Circuit City has spent more than $100 million redesigning worn-out stores, relocating poor performers and opening new outlets. The No. 2 electronics retailer sold its bank card business for $1.3 billion and narrowed its focus to profitable electronics. Refrigerators, microwaves and low margin software titles have been eliminated from its inventory.

Other changes are more subtle, such as restocking stores so customers can grab the merchandise off the shelves instead of waiting for employees to bring items from store warehouses.

The need to overhaul Circuit City became increasingly evident as Best Buy, with prime locations and a sharper focus, overtook its rival in the mid-1990s. Particularly humbling was Best Buy's ascent in the Richmond area -- Circuit City's turf.

"They came in here and kind of leapfrogged us," Froman said. "We're out-positioned by our enemies."

Circuit City hopes to tap emerging markets nationwide that its rival has not found. To help avoid costly mistakes, the retailer has been using business-intelligence software to analyze store and real estate data.

The analyses have led to several revelations: Costco makes a good shopping-center neighbor, but being situated near a bookstore does little to boost sales. Grocery stores also don't make the best co-tenants.

"The most surprising thing to me is how much opportunity there was by repositioning their real estate," said Jim Manzi, chief executive of Applied Predictive Technologies Inc., the Arlington-based software provider. "There's always some of that. But the degree of opportunity that this company has is very, very high."

So far, executives have been pleased with the performance of the remodeled and relocated stores. Customers, too, say they can tell the difference.

"It's easier to find things -- a little bit more spacious," said Jerry Ferguson, a freight broker from the Richmond area who was browsing in a remodeled store in Chesterfield County.

On a recent day, a small crowd of shoppers was drawn to the store's wide selection of digital, thin-panel LCD and plasma televisions, as well as its audio products.

Across the street, Best Buy had dedicated a substantial amount of space to washing machines, dryers, and other appliances. Shoppers said they preferred the retailer's computer, software, and music offerings. Best Buy also has a broader in-store selection of older movie titles on DVD, they said.

"They do a lot more DVDs," said Elvis Green, a Richmond resident. "I know if it's not here, it's probably not going to be (at Circuit City.)"

Some analysts say Circuit City is making all the right moves -- but too late in the game to make a difference in an industry that does not easily forgive missteps.

Analysts Scot Ciccarelli and Rick Weinhart of Harris Nesbitt Gerard said in a report this fall that Best Buy continues to "push the envelope" on competitive pricing as Circuit City struggles with decreasing sales and falling gross margins.

Indeed, sales announcements after the holiday season's kickoff provided more evidence of the battle Circuit City faces -- the retailer said sales declined 1 percent to $2.41 billion in the third quarter ended Nov. 30.

Although Circuit City reported sales gains in November, analysts said they were likely driven by heavy markdowns.

In the meantime, Minneapolis-based Best Buy widened the gap with third-quarter sales of $6.03 billion, up 18 percent.